Monthly Archives: August 2010

Following on from my mention of Morocco's attendance at the Washington Global Shale Gas Initiative Conference, what could be big news here from Tunisia:

The first hydraulic fracturing operation in a shale gas reservoir in North Africa took place earlier this year in El Franig field in west-central Tunisia in the Ghadames basin, said Cygam Energy Inc., Calgary.

Perenco, Paris, pumped 45 tonnes of ceramic sand into the Lower Ordovician Hamra quartzite at 4,000 m in Well No. 1 in El Franig field. The job opened an estimated 500-ft fracture. Perenco said initial well test results confirmed the potential to double gas production to 10 MMscfd, with possible further increases once the well cleaned up.

Later, another frac job was carried out at Well No. 5 in a shale formation of Silurian age, presumably the Tannezuft, in which 600 cu m of water charged with thin sand were pumped into the source rock formation at 3,950 m, generating a dense complex of microfractures.

What's notable is how this is not only the first in North Africa, but there have been only two or three in Europe so far. Note again, that it is in Tunisia, but near the Algerian border. So either this can be replicated in Algeria, or— they already have or know they could be successful.

Algeria already exports over 20BCM in LNG and pipeline gas to France, Spain, Turkey and the UK. Shale could make it more. Unless neighbours muscle in as well. BTW, let's not forget Libyan potential, it already has a pipeline to Italy…

Shale's impact on European LNG prices has been well documented here for two years, as the enormity of the US market morphing from importer to exporter via the current disinterested bystander stage.

Just as shale in North America has disrupted pipeline flows, first from Alberta and now even Texas shows sign of losing customers, shale/LNG has made it cheaper to import than to rely on pipeline flows, whether they be from residual North Sea contracts or Russian oil linked pipeline flows. The reality in Europe is that the pool of idiots who think that gas is running out shrinks every day. The world of surplus is changing everything. Remember a year ago when the energy bulls were saying that shale wouldn't have a European impact? Now even Asian LNG markets are waking up to what is good news for buyers and their economies and is the awful truth for producers. Why pay for security in a well supplied market?

A supply overhang in the global gas industry is pushing the market toward more trading and increased flexibility, Benjamin Klooss, lead economist for natural gas at UK major BP, said at an industry event Tuesday.

Apart from shale, any other reasons?:

But it was also a reflection of the recession, which meant that in 2009,for the first time since World War II, global GDP fell, he added. While the energy complex as a whole saw demand fall, natural gas consumption was hit hardest, he said, down 2.1% year on year globally in 2009.

Sorry Mr Klooss, you know as well as I do that supply was far higher than demand would have been anyway. There are a few UK buyers who bought that gas prices are only low because of the recession story, so they got suckered by the con-sultants into buying long, but they are few and far between lately. Shale and supply mean everything and Asian buyers are too smart:

The increase in volumes is still "mostly uncontracted," Klooss said,though half will "likely come from Australia and Papua New Guinea." That willmean that demand and supply of gas globally will increasingly be concentratedin Asia, he added. It will also give Asian buyers increased power in the market, he added."Will it mean Asian buyers then demand different contract terms? Will LNGcontracts move towards containing a spot element?" he said. Costs would provide some answers to those questions, he added, since new LNG projects have tended to be more costly, limiting the possibility of cheaper long-term contracts.

The conventional wisdom is that Asian buyers stress security, but that was in a market where security was worth paying for. The CW also said that LNG or pipelines or power stations won't get built if there isn't a guaranteed market.

That CW should go to the dustbin of history. Did you hear about Toyota building the car factory because of a guarantee of 500,000 car a year? Or how about the restaurant that didn't get finance because they weren't guaranteed 100 covers a day? Us neither. Time for a rethink on the whole damn thing?

What has conventional wisdom done for any gas trader lately? Not in this world now as we see from Europe and moving east..

"European oil-indexed contracts are coming under real pressure, but in Asian LNG, that's not happened just yet," Klooss said. "At current spot price levels, there is an incentive to shift to spot, but then there are questions over the costs of projects and getting support for them." There is a "persistent discount" in spot prices versus term LNGcontracts, Klooss said, which is likely to continue for the next few years given the ramp-up in LNG production. He added that while there would be a further jump in LNG supplies in 2014-15, demand is likely to have recovered by then.

Two views on Poland and shale gas. Firstly, the geologist's viewfrom Alberta Oil and Gas Magazine:

…national chief geologist Henryk Jezierski has granted more than 50 exploration permits covering 12 per cent of the country. Estimates by consulting firms from the United States suggest that Poland may be sitting on 1.5 to 3 trillion cubic meters (53 to 106 trillion cubic feet) of gas. The most optimistic forecast rates Poland’s potential as among the world’s top five largest deposits.

Top Five? Steady on. But let's pretend that Poland is only in the top twenty. Then let's pretend that all of a sudden a new North Sea came out of nowhere in European gas. That is the reality that we face. What we should not confuse are issues becoming obstacles and dead ends.

According to several sources I've spoken to independently of each other, Poland has the geology to produce market changing and life changing amounts of natural gas. Poland does not yet have the infrastructure to bring it to the markets.

“We are in the early stages of our project, but believe we have a great opportunity to make a significant gas discovery in Poland,” says Kamlesh Parmar of Lane Energy. “However, it must be remembered that our shale gas project is a relatively new concept for Europe, and will take some time and a good deal of capital investment before we are properly able to understand the production potential of the resource.”

Again, this comes down to whether or not bureaucrats want to create obstacles where there are only issues:

“We firmly believe that if companies such as ours are able to move our projects beyond the exploration stages, then rigs can be built or made available to increase activity,” says Lane Energy’s Parmar. He adds, “This, as you can imagine, will not happen overnight.”

Similarly Parmar is not concerned about potential environmental issues flagged by shale gas skeptics. Water requirements for the first drilling are adequately sourced from properly permitted wells. He plays down worries about a potential lack of additional water, saying such concerns will be addressed when necessary.

“Our main challenges in Poland are really around the fact that this is a relatively new concept for Poland – in fact for Europe too – so the regulatory regime and procedures which may work well for conventional projects, may not always be suitable for a shale gas project,” says Parmar. “In addition, there is limited availability of drilling and well-completion equipment and certified personnel. However, we have developed good working relations with the authorities and state company service providers in Poland and are confident that these can be addressed as our project progresses

This Economist blog posting reflects either reality, or is simply wishful thinking by the Gazprom/Ofgem/DECC Troika who wish us to keep buying lots of Russian gas:

POLISH politicians have of late tended to avoid saying anything that smacks of bipartisan consensus. One exception has been the near-universal belief that, thanks to abundant reserves of shale gas, the country is set to become "a second Norway", a land of energy-fuelled plenty with a highly functional state and exemplary social justice.

There are three problems with this proposition. First, it is far from assured that Poland's shale-gas reserves will live up to the hype provided by pundits eager for the country to free itself from Gazprom, the Russian monopolist that currently provides well over half of Poland's 13.6 billion cubic metre annual uptake. True, companies such as ConocoPhillips or Exxon Mobil have been sanguine about Polish gas, and the former has already begun prospecting. However, this is hardly proof that they will find anything worth extracting. At this stage no one actually knows how much gas is trapped in Polish shale. Estimates range from 150 billion cubic metres to over 20 times that figure. This should, at the very least, give optimists pause.

And it gets worse from there, ending up confusing Poland with Turkmenistan in a desperate sounding attempt to shore up the UK lights out brigade, before reality intrudes. Which it will sooner than they think.

My summer vacation/holiday (as compared to what?), was in a wifi free zone, for the past two weeks my main media has been the International Herald Tribune and the embarrassingly awful CNN International.

It did give me pause for thought among other things. Has getting out of the feedback loop over energy changed my mind on shale?

No. In fact, the more I think about it (confirmed by some tantalizing emails on my return), the more convinced I am that the next few months will be even more exciting than this year. I've been looking at shale for two years now, which gives me some realistic perspective on how the US experience is going to be replicated globally. I'll be sharing that here, in some conferences coming up this month and next (details soon), Petroleum Economist in September and BBC Radio 4 next week.

Not a summer vacation, but a conference in Washington last week underlined how far behind the UK and non Polish Europe are on shale. The US State Department organised a two day conference on the Global Shale Gas Initiative.

The worlds' press yawned on this one, but in Williamsport Pennsylvania, where the delegates took a road trip, they were happy to welcome the world to their door.

The U.S. State Department sponsored the visit, which followed the two-day Global Shale Gas Initiative Conference in Washington, D.C.

During a press briefing Tuesday, David Goldwyn, coordinator for the State Department's office on International Energy Affairs, said the development of natural gas resources from shale is "a terrific boon" for the United States and global energy security. Other countries want to develop their own shale gas deposits, but lack the experience needed to do it safely and efficiently, Goldwyn said.

The conference was held so "we could teach them what they need to know," he said.

Representatives from Armenia, Bulgaria, China, India, Indonesia, Jordan, Lithuania, Morrocco, Poland, Romania, South Africa, Ukraine and the U.S. arrived in Williamsport by bus from Washington.

The inference I guess is that UK energy experts like Charles Hendry, Alistair Buchanan and David MacKay don't need any lessons, they prefer to simply dismiss shale as irrelevant to the UK from this side of the Delaware Water Gap.

Back to the open-minded regulators from throughout the world in PA. Firstly, are there any surprises in the delegate country list? Not to us or our readers. The UK, obsessed with lights out caused by Russia, should ask themselves two questions: Why weren't they on the list, and why was Morocco? The story for European energy security, lies under our feet of course, although in the UK we seem too pig headed to realise it. But (yet another) key UK energy policy error is looking east, when the real news is coming from North Africa.

Meanwhile, back on the bus, surely all these regulators came up with all kinds of Gasland style horror stories to take home to their countries not under my back yard lobbies?

Jennifer Marot, manager of frontier geology for Petroleum Agency SA, the agency that regulates oil and gas exploration in South Africa, said she and agency CEO Mthozami Xiphu want to see the impacts of shale development first hand.

"We're just beginning shale gas exploration in our country," Marot said. "We want to make sure we learn as much as we can because you've done it all before.

"(South Africa) is concerned about the issue," she said. "We're a semi-arid country, so water is a precious commodity."

Ah yes, water, the one thing that Gazprom and Ofgem obsess about, in their effort to sell Europe more Russian gas instead of shale. But does the fear live up to the reality?

The tour made its way along Route 220 in Picture Rocks to two water withdrawal sites, Beaver Lake Road in Penn Township where Chief maintains a compressor station and fresh water impoundments and then to a gas rig near Lairdsville.

While viewing the well site, Marot said she was "impressed by the size of the footprint" of the gas operations.

BEIJING Aug 24 (Reuters) – China last week launched its first national shale gas research centre to support the country's development of the fuel. [ID:nTOE67M01O] Encouraged by the boom in shale natural gas drilling in the United States and driven by recurring domestic gas shortages, China has fast-tracked plans to explore the unconventional fuel in its homeland.

Interesting story from Le Devoir on shale exploration in Quebec. I really like Google Translate, it does wonders for Polish, but sorry it's never as good as the original in French, but let's try:

Companies engaged in gas exploration in Quebec are increasingly active in the Richelieu Valley, an area that could one day become a mecca for the exploitation of shale gas in the province. One of them is also breaking ground to determine the presence of precious fossil fuel in the Mont-Saint-Hilaire, less than 40 kilometers from Montreal.

It goes on to say that the Mayor didn't even know what was going on and that investigation found, as usual, someone's bought up all the good acreage already. Quelle surprise as they say in the Marcellus.

I've been talking up Quebec gas for over 18 months. And the end is in sight:

It will be quick. The Assignment revealed on Saturday that the first gas well could be connected to Gaz Metro in mid-2011, one in Saint-Edouard-de-Lotbinière and in Leclercville. Gaz Metro is awaiting government approvals.

Why am I so interested in Quebec gas? Because in about five years, maybe sooner, we'll be burning that gas here in the UK. Remember where you heard that.

That's right, the Ukraine, the number one source of obsession for Ofgem when they talk of how insecure the UK's gas supplies are. Number two is how all those LNG tankers will sail on by the UK leaving us in the dark. Sail to where they don't say of course.

So if Ukraine has shale gas, why on earth does Ofgem continue to obsess about it.Except to push up their plans to sabotage the economy even further by artificially pushing up electricity prices via CCS.

Shell will ask the Ukrainian Fuel and Energy Ministry to change legislation regarding shale gas production, Kommersant Ukrayina reports. During a roundtable entitled "The Prospects for Shale Gas Development in Ukraine" held in Kiev on August 12, Aleksey Tatarenko, Shell's liaison with government officials in Ukraine, stated Shell intended to invest in the segment if bigger areas are offered for production and license periods are lengthened and tax breaks introduced.

Ukraine is nervous about losing it's transit fee revenue if neighbouring Poland needs less Russian gas from it's own shale, at least in the short term. But the solution would lie in shale production domestically:

On July 2 this year, Ukrainian Deputy Prime Minister Andrey Klyuyev said the government felt the issue of alternative gas holds prospects, specifically, shale gas in Ukraine. He said that despite the fact production safemdonline.com/cymbalta.html costs of shale were higher than for traditional gas, it was still a very promising field.

The Deputy Prime Minister is mis-informed of course. Shale production costs are falling and judging by US best practice would be at least half the price of oil-linked Gazprom prices. But judging by the continuing moth to flame fascination with CCS that our Prime Minister, Deputy Prime Minister and DECC Secretary have based on the ludicrous assertion that the UK has gas security of supply issues, he's way ahead of us.

UPDATE:

Very interesting story here from Platts on Ukraine's shale potential both in it's size and the timescale:

Ukraine will increase output of natural gas by at least 50% over the nextthree years to about 30 billion cubic meters a year, First Deputy PrimeMinister Andriy Kliuyev said. "Now, Ukraine is producing about 20 billion cu m of gas annually. But Ithink in three years we will boost the output at least 50%," Kliuyev said in alive interview with Channel 5 television late Monday.

In January through July 2010 Ukraine's natural gas production fell 6.4%year-on-year to 11.68 Bcm, down from 12.48 Bcm a year ago, according to theenergy and fuel ministry.

At the same time, Ukraine increased imports of gas from Russia by 55.2%year-on-year to 17.7 Bcm from 11.4 Bcm in January-July 2009, according to theministry.

An extra 10BCM in three years? Unlikely perhaps, but if people really want to, as we are seeing in China and India leapfrogging Europe, it could be done.

The question will be, who is more impacted and more nervous about this news? Russia, losing a customer, Poland gaining a competitor or the UK's DECC and Ofgem and the spend, spend, spend money on CCS lobby?

Or so says the National Journal contributor William O'Keefe, CEO of the George Marshall Institute in a discussion that David Cameron's energy advisers need to read on "How Viable is Clean Coal?"

The administration’s carbon capture task force acts as a reminder of Ronald Reagan’s observation that “government doesn’t solve problems, it subsidizes them.” Its report really said that clean coal technology is not commercially competitive and making it competitive involves making other energy sources more expensive. Carbon capture and storage is one way to mitigate emissions from burning coal but it is nowhere near ready for widespread use. Indeed, it may turn out to never be commercially viable. Additional time and R&D — not taxpayer funded subsides — will provide the ultimate answer.

The UK is asking everyone to tighten up to keep the bond market vampires away from us. But when will the bond market vigilantes wake up to what an incredible con job the CCS industry is trying to pull on the UK, all with the connivance of the radical all fossil fuel is evil tendency of David MacKay at the DECC. He doesn't believe in a low carbon future, he wants us to build a no carbon at all future for 2050 using today's technology. Forty years ago, electric typewriters were the wave of the future. Who says CCS will be any different?

Ofgem wants us to plan for a 2050 future based on a 2050 scenario of Russia/Ukraine gas disputes. Quite apart from the impact of shale, is that a wise move? Political problems of forty years ago we no longer have for example: Cold War. Red China. Vietnam War. Northern Ireland. Apartheid. Russia and Ukraine is getting solved today, let alone in forty years. But if we follow DECC and Ofgem, we end up throwing money at problems we barely have today, starting with number one: Gas is abundant, secure and cheap. Nuclear and CCS industries should get over it. And so should the bond market.

It astounds me that we are having a radical government re-think in all areas. Even the Army is not sacrosanct, nor even Trident.

But in energy, the differences between April 2010 and today are minimal. Nuclear, CCS and off-shore wind, in short anything really big that requires a big subsidy are lining up with their paws out, ready for their reward for patiently waiting in the wilderness for years. Failure to pay up to their blackmail means lights out. When is this going to get through the heads of UK policy makers. The UK economy does not need new energy levies, also known as taxes. It does need a shot in the arm from market forces, which it seems we're going to get whether we want them or not. But when will market forces work in energy policy again/